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Will recovery and resolution requirements be applied to insurers?

Insurers, recovery and resolution requirements

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On 7 March, the International Association of Insurance Supervisors (IAIS) issued a major consultation package covering proposed revisions to a number of IAIS Insurance Core Principles (ICPs) (relevant to the supervision of all insurers within a member country’s jurisdiction) and ComFrame-related material (which relates to the group-wide supervision of internationally active insurance groups (IAIGs)). This is the first of three scheduled releases planned for 2017.

While the IAIS has no powers to enforce compliance, most IAIS member countries aim to ensure ICP compliance. Most countries in the EEA are members of the IAIS in their own right, with EIOPA also a member. As such, any significant changes introduced by the IAIS are likely to be reflected in European requirements in due course.

Of these papers, the ones of most interest to firms will be the proposals on recovery (ICP 10) and resolution (ICP 12). These papers bring recovery and resolution considerations into the supervision of all insurers (and insurance groups). This is a marked step change from applying only to the nine globally systemically important insurance groups (G-SIIs).

In accordance with the overriding proportionality principle that applies to all ICPs, ICP 10 states that supervisors “may” require an insurer to produce a recovery plan. This suggests that many smaller insurers/insurance groups will not be subject to any recovery requirements. However, IAIGs are required to both develop a recovery plan and “take actions for recovery”.

ICP 12 specifically includes reference to the proportionate use of supervisors’ resolution powers, subject to the “no creditor worse off than in liquidation” principle. Resolution plans need to be drawn up only where this is deemed necessary by the solo/group-wide supervisor, although where the supervisor identifies specific risks to resolution, insurers must (where appropriate) develop contingency plans to mitigate these risks. For IAIGs, resolution plans must in particular address the continuity of critical economic functions.

Solvency II does not specifically address recovery and resolution requirements, so the publication of ICP 10 and 12 may add weight to EIOPA’s views expressed in its recent discussion paper (CP-16/009) regarding the need to harmonise insurer recovery and resolution regimes across EEA countries. The EIOPA report largely follows the key attributes approach originally set out by the Financial Stability Board (FSB) and highlights that most of the resolution powers listed by the FSB are not widely available in existing regulatory frameworks.

Despite recognising that existing resolution powers (such as portfolio transfers run-off) have worked well, EIOPA notes that these have not been tested by the failure of large cross-border insurance groups. However, its tentative conclusion that a minimum harmonisation of recovery and resolution regimes should be implemented runs counter to the common view amongst the insurance community that such a framework is not required, not least due to the ladder of intervention powers granted by Solvency II on breaches of solvency and minimum capital requirements.

It remains to be seen whether, and how quickly, local supervisory processes will react, especially as the ICPs and updated ComFrame material will only become effective from 1 January 2020. However, given EIOPA’s interest in this area, insurers could consider:

Identifying any critical economic functions it performs (for example payments to pensioners or compulsory insurance coverage) and potential impact to the wider economy were those services to be disrupted

How these functions could be preserved in a resolution situation

Identifying potential barriers to recovery/resolution and consider whether and how these could be reduced without significant disruption to ongoing business. This could include financial, legal and operational barriers

Whether current stress testing and reverse stress testing is sufficiently robust with respect to management actions available in a stress scenario